Video Podcast by Shyam Sekhar
Transcript
Learnings from FY24. Our financial year has just drawn to a close. We all are very keen to go into the next financial year, to do new things, to try different approaches, and to grow wealth. As an advisor, it’s never easy to prepare people for another financial year. Before one thinks about how to prepare people for the next financial year, it’s important to take stock of the year that ends. And that’s what I’m going to do in this video. Last year, most people were focusing only on microcaps, small caps, mid-caps, and SME. I know people who had portfolios with 80, 90% of only these stocks. A friend of mine who’s a hugely respected professional, told me that he has ultra HNIs who focus mainly on buying companies with market cap of less than 500 crores. What was that logic? People were thinking that smaller companies, if bought adequately, will go up faster. That is, if you build a big position in a very small company, the liquidity in the stock would be so low that people who come to buy after you would have to buy at a higher price and bid the price up if they have to build the quantity.
This was like taking vantage positions in stocks, hoping that those who need positions later will pay a very heavy price. It’s nothing but the greater fool theory because at some point, you get disconnected from valuations and you are so connected to the liquidity in the stock, you get shareholder lists, tally how the top 100 shareholders are having concentrated ownership in the stock, and that becomes your equity research. I saw this happen a lot in SME, microcap, smallcap, and a lot of HNIs seem to have made that some a success formula. When my friend said this, I thought to myself, “Oh, if this stock cannot be sold, what will happen to these people?” And I asked him that question. He said, “That’s what remains to be seen.” And then suddenly something struck me that I had not focused on companies below 500 crores throughout that year because I felt most of these companies were not attractive from a valuation standpoint. Yet, people found them attractive from a floating stock and liquidity standpoint, and they were actually buying on that premise. Liquidity will come in every single company. You may think that there is no liquidity. The promoter will come and do a QIP.
He will come and place his own shares because the valuation, when it’s bid up to a level which is crazy, irrational, those who have more stocks will come and sell. More stocks than the HNI. The HNI may not sell, but somebody who has even higher position can come and sell, and that’s the promoter. And somebody who wants to use this opportunity to raise capital can also come and issue fresh stocks, and that again would be the promoter. That is what we are seeing in most companies, where floating stock was the criteria to buy, bet, and then bid up prices. This has been some a formulaic approach in 2023, 2024, I would think this approach will spectacularly fail in the next financial year. So if you are in one of these things, I would think that you should contemplate how you will save yourself and protect your profits. Many people may say that, oh, because he didn’t buy this, he’s saying this. Not at all. I believe that if you are buying investments which are very liquid and in businesses which will do better in the coming years, you will still make more money than what money you would make in a illiquid stocks.
Because illiquid stocks, when they dry up in trading, can create havoc in your portfolio. Somebody may come and sell, and they will bid the prices down by 20 to 30%. I’m seeing that in one of the illiquid companies which I am invested in. I’m not worried about the selling because my buying has been in a very low price and I plan to hold it for at least five more years. But I’m seeing how one mutual fund selling that stock is collapsing the prices. And it’s a small cap fund. It wants to get out and selling at any price. This a thing will happen in hundreds of stocks in the coming financial year. So it’s important that you learn the lessons soon enough, and you learn it well enough that you apply the right approach from here and ensure that selling doesn’t affect your portfolio. Scarcity of stock cannot be a singular formula to creating wealth in your portfolio. You need a more fundamental-driven investment approach in the next year. And I think that last year, people thought fundamentals don’t matter that much. If a stock is illiquid, it’s easy to make money. And I think that premise is what you should destroy in your own mind.
That formula is what you should constructively destruct, because if you do it first, then you are better off. If the market does it for you, you’re not going to be better off. This is something which investors need to internalize. And I have been internalizing this throughout this year. It’s not been a bad year at all for me because whatever I have focused upon, I’m managing to still act decisively. And the stocks are liquid, I’m managing to buy them both for myself and for my investors. And I have not paid much impact cost, nor am I trying to be hurrying the results in these stocks. I’m not going and telling people, Oh, this is a great stock. Why don’t you look at it? Why don’t you buy this? I’ll wait for these stocks to get their day under the sun. The performance should drive the evaluations. Until then, I would just wait and watch. Essentially, the next year is going to be a year where patience is going to be a bigger driver than momentum. I think that momentum, when it recoils, can create havoc, and that havoc is likely to happen. In fact, if you see what has happened in the recent months, you can see the damage that has happened in microcaps, the damage that is happening in small caps.
And this damage is going to be more market in stocks owned by mutual funds and institutions because money will flow out of these places. And when they flow out, people will sell these companies. And when they sell, impact cost will affect on the downside just the same way or even significantly more than impact cost benefited on the upside. So the downside will harm more than the upside gave you benefits. That is essentially the learning which you must carry from the last financial year into the next one. This is my conviction and my belief. I’ve shared it with you. Those who agree can think about this and use it constructively in your to save yourself from the pain of negative impact cost. Thank you very much for watching this video.
